MUNICIPAL MORTGAGE & EQUITY LLC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004

Commission File Number: 001-11981

MUNICIPAL MORTGAGE & EQUITY, LLC

(Exact Name of Registrant as Specified in Its Charter)


Delaware		52-1449733
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)


621 E. Pratt Street, Suite 300
Baltimore, Maryland		21202-3140
(Address of Principal Executive Offices)		(Zip Code)

(443) 263-2900
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [x] Yes [ ] No

The Registrant had 34,853,634 common shares outstanding as of July 30, 2004.

MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-Q


Part I	–	FINANCIAL INFORMATION

Item 1.		Financial Statements	3

Item 2.		Management’s Discussion and Analysis of Financial Condition
		and Results of Operations	33

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	47

Item 4.		Controls and Procedures	47

Part II	–	OTHER INFORMATION

Item 2.		Changes in Securities, Use of Proceeds and Issuer Purchases	47
		of Equity Securities

Item 4.		Submission of Matters to a Vote of Security Holders	47

Item 6.		Exhibits and Reports on Form 8-K	48

Signatures			49

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements, which involve certain risks and uncertainties. Assumptions contained in various portions of this Quarterly Report on Form 10-Q involve judgments with respect to, among other things, future economic market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Municipal Mortgage & Equity, LLC (“MuniMae” and, together with its subsidiaries, the “Company”). Although the Company believes that the assumptions underlying the forward-looking information included herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that such forward-looking information will prove to be accurate. In light of the significant uncertainties inherent in forward-looking information, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

Item 1. Financial Statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)


	June 30, 2004			December 31, 2003
ASSETS
Investment in tax-exempt bonds, net (Note 2)	$	1,180,237		$	1,043,973
Loans receivable, net (Note 3)		574,956			497,884
Loans receivable held for sale (Note 3)		39,740			54,492
Investment in partnerships (Note 4)		1,587,008			282,492
Investments in derivative financial instruments (Note 5)		3,320			2,563
Cash and cash equivalents		99,962			50,826
Interest receivable		18,205			16,843
Restricted assets (Note 6)		194,843			75,525
Other assets		66,786			73,961
Land, building and equipment		177,284			5,429
Mortgage servicing rights, net		11,622			10,967
Goodwill		108,578			107,505
Other intangibles		24,801			27,159

Total assets	$	4,087,342		$	2,249,619

LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable (Note 7)	$	1,010,878		$	646,096
Mortgage notes payable (Note 7)		122,578			—
Debentures (Note 8)		60,000			—
Short-term debt (Note 7)		409,493			371,881
Long-term debt (Note 7)		179,988			190,090
Preferred shares subject to mandatory redemption		168,000			168,000
Tax credit equity guarantee liability (Note 9)		150,475			151,326
Investments in derivative financial instruments (Note 5)		10,545			15,287
Accounts payable and accrued expenses		16,989			17,506
Interest payable		13,533			9,581
Unearned revenue and other liabilities		79,074			37,986

Total liabilities		2,221,553			1,607,753

Commitments and contingencies (Note 10)		—			—

Minority interest in subsidiary companies (Note 1)		1,192,038			31

Shareholders’ equity:
Common shares, par value $0 (38,071,099 shares authorized, including 34,905,251
shares issued and outstanding, and 43,933 deferred shares at June 30, 2004
and 35,926,099 shares authorized, including 32,592,093 shares issued
and outstanding, and 39,701 deferred shares at December 31, 2003)		692,034			654,700
Less common shares held in treasury at cost (124,715 at June 30, 2004 and
December 31, 2003)		(2,615	)		(2,615	)
Less unearned compensation (deferred shares) (Note 1)		(3,799	)		(3,992	)
Accumulated other comprehensive loss		(11,869	)		(6,258	)

Total shareholders’ equity		673,751			641,835

Total liabilities and shareholders’ equity	$	4,087,342		$	2,249,619

The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)


	For the three months ended						For the six months ended
	June 30,						June 30,
	2004			2003			2004			2003
INCOME:
Interest income
Interest on bonds and residual interests in bond securitizations	$	21,340		$	14,366		$	40,842		$	30,721
Interest on loans		11,388			7,894			22,109			17,804
Interest on short-term investments		1,859			332			2,666			524

Total interest income		34,587			22,592			65,617			49,049

Fee income
Syndication fees		4,190			1,825			7,941			3,236
Origination and brokerage fees		2,848			2,219			3,765			2,917
Loan servicing fees		1,139			1,070			2,258			2,202
Asset management and advisory fees		1,967			1,198			8,133			2,274
Guarantee fees		1,506			112			3,359			223
Other income		1,705			3,197			3,542			5,283

Total fee income		13,355			9,621			28,998			16,135

Net rental income		5,496			—			5,496			—

Total income		53,438			32,213			100,111			65,184

EXPENSES:
Interest expense		21,279			8,724			36,743			19,092
Interest expense on preferred shares		3,035			—			6,081			—
Salaries and benefits		20,421			8,671			33,480			14,637
General and administrative		6,992			1,972			11,017			3,628
Professional fees		2,731			877			4,225			1,866
Depreciation and amortization		3,597			414			5,209			803

Total expenses		58,055			20,658			96,755			40,026

Net gain on sale of loans		1,730			540			2,410			1,720
Net gain (loss) on sale of tax-exempt investments		1,013			(6	)		1,205			(6	)
Net gain on sale of investments in tax credit equity partnerships		379			178			2,814			276
Net gain on termination of derivatives		—			741			—			741
Net holding gains (losses) on derivatives		7,853			(2,449	)		5,498			424
Impairments and valuation allowances related to investments		(430	)		(1,144	)		(730	)		(1,144	)
Net losses from equity investments in partnerships		(71,224	)		(1,606	)		(81,735	)		(2,353	)

Net income (loss) before income taxes, income allocable to minority interest, discontinued operations and cumulative effect of accounting change		(65,296	)		7,809			(67,182	)		24,816
Income tax benefit (expense)		(173	)		540			2,337			472

Net income (loss) before income allocable to minority interest, discontinued operations and cumulative effect of accounting change		(65,469	)		8,349			(64,845	)		25,288
Net income (expense) allocable to minority interests		76,659			(2,995	)		76,764			(5,989	)

Net income before discontinued operations and cumulative effect of
accounting change		11,190			5,354			11,919			19,299
Discontinued operations		—			25,748			—			25,748

Net income before cumulative effect of accounting change		11,190			31,102			11,919			45,047
Cumulative effect of a change in accounting principle		—			—			520			—

Net income	$	11,190		$	31,102		$	12,439		$	45,047


The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2004		2003		2004		2003
Basic earnings per common share:
Earnings before discontinued operations and cumulative effect of
accounting change	$	0.32	$	0.19	$	0.35	$	0.69
Discontinued operations		—		0.89		—		0.91
Cumulative effect of a change in accounting principle		—		—		0.02		—

Basic earnings per common share	$	0.32	$	1.08	$	0.37	$	1.60

Weighted average common shares outstanding		34,800,580		28,857,305		34,047,243		28,104,281
Diluted earnings per common share:
Earnings before discontinued operations and cumulative effect of
accounting change	$	0.32	$	0.18	$	0.35	$	0.68
Discontinued operations		—		0.88		—		0.90
Cumulative effect of a change in accounting principle		—		—		0.02		—

Diluted earnings per common share	$	0.32	$	1.06	$	0.37	$	1.58

Weighted average common shares outstanding		35,140,968		29,213,062		34,406,363		28,451,480

The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)


	For the three months ended						For the six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Net income	$	11,190		$	31,102		$	12,439		$	45,047

Other comprehensive loss:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period		(202	)		16,540			(4,406	)		21,116
Reclassification adjustment for gains included in net income		(1,013	)		(24,726	)		(1,205	)		(24,726	)

Other comprehensive loss		(1,215	)		(8,186	)		(5,611	)		(3,610	)

Comprehensive income	$	9,975		$	22,916		$	6,828		$	41,437


The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)


										Accumulated
										Other
	Common			Treasury			Unearned			Comprehensive
	Shares			Shares			Compensation			Loss			Total
Balance, January 1, 2004	$	654,700		$	(2,615	)	$	(3,992	)	$	(6,258	)	$	641,835
Net income		12,439			—			—			—			12,439
Unrealized gains on investments, net of
reclassifications		—			—			—			(5,611	)		(5,611	)
Distributions		(30,689	)		—			—			—			(30,689	)
Options exercised		1,410			—			—			—			1,410
Issuance of common shares		52,482			—			—			—			52,482
Deferred shares issued under the
Non-Employee Directors’ Share Plans		104			—			—			—			104
Deferred share grants		1,588			—			(1,588	)		—			—
Amortization of deferred compensation		—			—			1,781			—			1,781

Balance, June 30, 2004	$	692,034		$	(2,615	)	$	(3,799	)	$	(11,869	)	$	673,751


	Common		Treasury
SHARE ACTIVITY:	Shares		Shares
Balance, January 1, 2004		32,507,079		124,715
Options exercised		76,050		—
Issuance of common shares		2,145,669		—
Issuance of common shares under
employee share incentive plans		91,440		—
Deferred shares issued under the
Non-Employee Directors’ Share Plans		4,231		—

Balance, June 30, 2004		34,824,469		124,715

The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE & EQUITY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


		For the six months ended
		June 30,
		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$		12,439	$	45,047
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders			—		5,679
Cumulative effect of a change in accounting principle			(520)		—
Net holding gains on trading securities			(5,498)		(424	)
Impairments and valuation allowances related to investments			730		1,144
Amortization of guarantee liability			(2,149)		—
Net gain on sales			(6,429)		(2,731	)
Loss from investments in partnerships			81,735		2,353
Minority interest income			(76,764)		—
Distributions received from investments in partnerships			3,694		5,224
Net amortization of premiums, discounts and fees on investments			978		(185	)
Depreciation, accretion and amortization			8,376		1,048
Discontinued operations			—		(25,748	)
Deferred income taxes			2,527		1,283
Tax benefit from deferred share compensation			—		330
Deferred share compensation expense			1,781		883
Common and deferred shares issued under the Non-Employee Directors’ Share Plans			104		135
Net change in assets and liabilities:
Increase in interest receivable			(1,362)		(1,095	)
(Increase) decrease in other assets and goodwill			(14,202)		11,306
Increase in accounts payable, accrued expenses and other liabilities			11,399		10,353
Decrease in on loans held for sale			15,361		31,730



Net cash provided by operating activities			27,146		54,602

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and residual interests in bond securitizations			(182,928)		(73,769	)
Loan originations			(164,956)		(123,427	)
Purchases of property and equipment			(8,076)		(394	)
Net investment in restricted assets			10,484		(29,211	)
Principal payments received			89,930		134,661
Termination of derivative financial instruments			—		(10,809	)
Proceeds from the sale of investments			38,479		44,558
Net investment in partnerships			(132,383)		(5,574	)

Net cash used in invested activities			(349,450)		(63,965	)